Amidst the global semiconductor boom, Japan is quietly emerging as one of the major beneficiaries in this technological feast, demonstrating a combination of modesty and robustness in its approachThe Japanese semiconductor manufacturing equipment sector, represented by its association (SEAJ), has recently revealed that the sales of semiconductor equipment in November 2024 reached an astounding 4,057.88 billion yenThis marks a significant year-on-year growth of 35.2%, showcasing the resilience and upward momentum of the industry.

For a more vivid understanding of this strong sales trend, consider the following statistics: Japan's semiconductor equipment sales have seen consecutive year-on-year growth for 11 months, which includes an impressive double-digit growth rate (over 10%) for the eighth consecutive month

Moreover, November recorded the largest year-on-year increase in 26 monthsMonthly sales have surpassed 300 billion yen for the 13th consecutive month, and this November even set a historical record for sales since statistical tracking began in 1986.

These five points illustrate the dynamic nature of Japan's semiconductor equipment marketCumulatively, from January to November 2024, the total sales reached 39,922.35 billion yen, reflecting a significant increase of 20.9% compared to the same period last yearIn comparison with previous years, this figure has surpassed that of 2022 when sales were recorded at 35,451.02 billion yen, resulting in a historic high.

In the global semiconductor landscape, Japan’s prominence is well-recognized, particularly in the realm of semiconductor materials where it leads the field

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Many top suppliers of semiconductor materials and consumables hail from Japan, with several holding an absolute leading position or even monopolistic control over particular products.

However, the semiconductor equipment sector also showcases Japan's critical influence, with manufacturers maintaining a significant presence in the global marketUp until 2010, Japan and the United States were in fierce competition for market share in semiconductor equipmentYet, from 2012 onward, Japan's market share began to drop sharply, hitting less than half of the U.Sshare by 2022, resting at only 24%.

Despite this sharp decline, Japanese manufacturers remain prominent players in the global semiconductor equipment marketIn 2023, the top ten semiconductor equipment manufacturers worldwide included ASML, Applied Materials, Lam Research, Tokyo Electron, KLA Corporation, Dainippon Screen, ASM International, Advantest, Disco Corporation, and Teradyne

Among these, ASML and ASM International are Dutch companies; Applied Materials, Lam Research, KLA, and Teradyne hail from the U.S.; while Tokyo Electron, Dainippon Screen, Advantest, and Disco are Japanese firms.

According to reports, Japanese semiconductor equipment accounts for 30% of global market share in terms of sales, ranking second only to the U.SFurthermore, the production capacity for advanced AI chip manufacturing faces constraints primarily due to TSMC's limited capacity, which is projected to expand from the current 60,000-70,000 units per month to 90,000-100,000 by the end of 2025. This expected increase could result in a total annual production capacity reaching approximately 700,000 units or more, doubling the anticipated capacity of 350,000 units for 2024.

In parallel, major packaging firms and Integrated Device Manufacturers (IDMs) are vigorously developing their respective 2.5/3D packaging platforms, entering a phase of accelerated capacity expansion

This worldwide expansion of advanced packaging will significantly boost orders for backend equipment while also increasing the demand for frontend equipment such as RDL (Redistributed Layer), TSV (Through-Silicon Via), and Bumping processes.

As we delve into the specifics, frontend devices like lithography machines, coating and developing equipment, and wet etching machinery are vitalThe backend equipment for 2.5/3D advanced packaging demands more advanced techniques than traditional packaging, especially regarding pick-and-place machines, grinding machines, temporary bonding/debonding equipment, and testing machines.

Examining the offerings from various manufacturers, Tokyo Electron provides a range of equipment including coat and develop systems, thermal processing units, dry etching tools, chemical vapor deposition systems, wet cleaning machines, and testing equipment

Dainippon Screen specializes in etching, coating and developing, and cleaning technologies, while Advantest focuses on backend testing machines and sortersDisco Corporation is renowned for manufacturing precision cutting, grinding, and polishing equipment for semiconductor processing.

Dainippon Screen reportedly boasts a market share of around 75% for thinning and cutting equipment, and Advantest exceeds a 50% share in testing machinery.

China Emerges as a Major Export Destination

China stands out as a significant export destination for Japanese semiconductor equipment.

According to trade statistics from the Japanese Ministry of Finance, exports of semiconductor manufacturing equipment and components to China have consistently represented more than 50% since the third quarter of 2023. Notably, Japanese equipment has remained the leading import source for China since 2021, although recent upticks in imports from the Netherlands, particularly in the lithography sector, have also become notable.

Looking ahead to 2024, predictions for Japan's semiconductor equipment export figures indicate significant growth

According to SEAJ, between January and March 2024, exports to China are projected to hit 521.2 billion yen, reflecting an impressive increase of 82% compared to the same period in 2023.

From January to June 2024, nearly half of Japan's semiconductor equipment exports are expected to be directed toward the Chinese market, with global semiconductor equipment sales anticipated to reach $53.2 billion, marking a 1% increase year-on-yearNotably, China’s share in total global sales is expected to rise dramatically from 25% last year to an astonishing 46%, setting a new record.

The above statistics emphasize two key points: firstly, China remains the primary export market for Japanese semiconductor equipment; and secondly, growth in the semiconductor equipment sector within China is accelerating rapidly

This surge can also be attributed to the export control measures imposed by the United States.

On May 23, 2023, Japan's Ministry of Economy, Trade and Industry announced revisions to the Foreign Exchange Law, including 23 categories of semiconductor equipment necessary for advanced chip manufacturing as controlled export items, effective July 23. Presently, appliances not categorized as advanced products are still unrestricted, but there are increasing expectations regarding the potential expansion of export controls to encompass these devices as well.

Tokyo Electron's CEO, Toshiaki Kawai, has remarked on the uptick in pre-orders from China, indicating a robust future demandSimilarly, ASML's CEO, Christophe Fouquet, confirmed the strong and persistent demand in the Chinese market, with anticipated sales soaring to nearly three times the figures from the same period last year.

In contrast, the sales outside the Chinese market fell to $28.4 billion, a decrease of 27%. The semiconductor industry remains cautious about investments due to the slow recovery in the smartphone and personal computer markets, compounded by a deceleration in the growth of the electric vehicle market

Though investments in cutting-edge semiconductors for data centers involved in artificial intelligence (AI) have ramped up, they are not sufficient to offset the declines noted elsewhere.

What Do Semiconductor Equipment Companies Think?

The performance of Japanese semiconductor equipment manufacturers further underscores the significance of the Chinese marketFor instance, nearly half of Tokyo Electron's revenue originates from ChinaBy the second quarter of 2024, over 50% of the company's income is projected to derive from the Chinese mainland.

Tokyo Electron has reported robust growth trends, with China actively investing in mature semiconductor technologiesDainippon Screen, for example, indicated a dramatic 193% increase in revenues coming from the Chinese market in the second quarter of 2024.

Reports indicate that Advantest has also elevated its performance outlook owing to the Chinese market's growth, with its overall revenues primarily being driven by overseas operations, maintaining a stable income share above 95%, and China emerging as the largest source of revenue.

Recently, Advantest raised its revenue forecast for the 2024 financial year, expecting 640 billion yen (approximately $4.19 billion) in revenue, marking an impressive 31.6% year-on-year increase

The operating profit forecast stands at 165 billion yen, while the net profit anticipates reaching 122 billion yen, both doubling from the previous fiscal year, driven largely by robust demand for semiconductors related to generative AI and the successful expansion of System on Chip (SoC) and High Bandwidth Memory (HBM) device businesses.

Investments in memory, high-performance computing, and AI-related SoC packaging systems in South Korea are pivotal in driving ongoing upgrades in financial forecasts as well.

Is Japan's Semiconductor Equipment Sector on an Upward Trajectory Again?

Recently, SEAJ has upgraded its sales forecast for Japanese semiconductor manufacturing equipment, predicting that for the fiscal year 2024 (April 2024 - March 2025), sales will surpass 4 trillion yen for the first time, anticipated to grow by 15.0% to reach 4,252.2 billion yen, marking a revision of around 5.4% from the previous estimate of 4,034.8 billion yen and setting a new historical record.

The SEAJ further noted that it expects stable growth in investments for logic/foundry and memory chips, and therefore will adjust the forecast for fiscal year 2025 (April 2025 - March 2026) from the previously estimated 4,438.3 billion yen to 4,677.4 billion yen, reflecting a 10.0% year-on-year growth

Additionally, the demand for AI-related semiconductors is expected to continue elevating the need for semiconductor equipment, with projections for fiscal year 2026 indicating a 10.0% increase to 5,145.2 billion yen, being the first time yearly sales are projected to exceed the 5 trillion yen threshold.

SEAJ anticipates that during the period from 2024 to 2026, the compound annual growth rate (CAGR) of Japan's semiconductor equipment sales will reach 11.6%, with Japan's global share in semiconductor equipment sales standing at 30%, trailing only the U.Sin global rankings.

Kawai expressed that beyond servers, the integration of AI functionalities will accelerate on PCs and smartphones, projecting that by 2027, 30%-40% of PCs and smartphones will incorporate AI capabilities, which will significantly enhance the demand for semiconductor equipment, even more than that for servers.

Regarding the mainland China market, Kawai reiterated that the lack of self-sufficiency in semiconductor manufacturing equipment ensures continued stable demand for Japanese semiconductor apparatus.

Simultaneously, indigenous semiconductor equipment companies in China are capitalizing on such opportunities to thrive

In 2023, North Huachuang's revenue reached 22 billion yuan, enhancing 50% year-on-year, with a net profit of 3.9 billion yuan, representing a 66% rise, thereby ranking eighth in the worldThis marks the first occasion that a Chinese manufacturer has entered the top ten list, reflecting both the company's robust capabilities and the broader ascendance of the Chinese semiconductor equipment industry.

Overall, the rise of homegrown semiconductor equipment companies in China is poised to reduce the domestic semiconductor industry’s dependence on imported equipment, enhancing the security and stability of supply chainsWith ongoing technological breakthroughs and the evolution of the industry ecosystem, the Chinese semiconductor equipment sector is increasingly set to play a pivotal role on the global stageThis enduring trend will undoubtedly have profound implications for the future trajectory of the Japanese semiconductor equipment industry.